Will Mortgage Rates Go Higher Today?

Mortgage Interest rates moved sharply higher this summer when Fed Chief Bernanke announced that the Economy is doing marginally better, and the Fed might stop purchasing Mortgage Backed Securities. The Fed purchase of Mortgages, over 40 billion a month, has been a driving force in keeping mortgage interest rates low – so it figures that any move by the Fed to reduce the amount they will be purchasing could be seen as Risky to the overall Bond Market.

The Fed announced at it’s monthly meeting yesterday that they are going to continue buying mortgages at the current rate… for now. It appears that any pull back in the amount of mortgages they buy will depend on how well the Economy is doing. The ONE REPORT that most Economist, including the Fed generally watch to see how we’re doing is the monthly Non-Farm Payroll numbers. That comes out today. More people employed – bad for mortgage rates, fewer people on payroll, better news for mortgage rates.

Why Would Mortgage Rates Go Higher If the Fed Stops Buying Mortgages?

A big part of the mortgage and real estate meltdown happened because of the way mortgages are sold. Once you close on your loan, it’s usually “bundled” with like mortgages, and the interest income is sold to annuities (usually). Waaay back in the 1970’s when my dad was one of the first people selling mortgage backed securities in this fashion – he sold them to the NC Teachers Union.

The Teachers Union held the pension income for future generations of retired teachers – and they needed to invest that money in something that was VERY secure – and had a fixed rate of return. So they would invest in mortgages here in NC. Until values went down, and people started defaulting on their mortgages – and there were short sale negotiations, it was a beautiful system.

But then we had that whole period of time when there WERE risky mortgages made – and it didn’t make sense for the Teacher’s Union (for instance) to buy mortgages. Did people continue to buy houses anyway? Sure, and that’s why the the Federal Reserve started picking up the slack, becoming the primary source for the purchase of mortgages. There’s really been no big push to go back to those sources of bond holders to get them to start buying again… and if nobody wants to buy the mortgages, banks will not want to make them.

Why would I say that if no one is buying mortgages, Banks won’t want to make them? Well, with the whole meltdown – much tougher Bank regulation went into play. Regulation that requires certain liquidity standards. Banks can’t just lend out money at 3 and 4 percent as the economy gets better and interest rates go up.

Private Investors, like the Teachers Union will definitely need to pick up the slack – but we don’t think that will happen until there’s a FULL STEAM recovery, not just “signs” that things are getting better.

What does that mean for Mortgage Interest Rates for the Next 60 to 90 days?

We normally just watch the Jobs numbers to see how the market is going and the direction for mortgage rates. So good jobs numbers, usually bad for mortgage rates – but now, we also need to carefully watch other reports to look for subtle signs of a stronger economy. We’ve been in a slump for so long, we never really had to pay attention to Manufacturing and Inventory numbers. As they show strength, rates will go higher. We are also keeping an eye on the monthly Fed Meeting Notes.

Sometime this year, it’s anticipated that Fed Chief Bernanke will be replaced – when that happens will the Fed keep buying mortgages at the same pace? The answer to that question could be what causes home prices to go up… or back down.

About Eleanor Thorne

I see myself differently than most loan officers in the Cary/Raleigh market. As a rare Cary native, I see myself as an expert on the area, on mortgage industry changes & factors that effect rates! I’ve lived in Cary since 1968 – and I’m second generation “mortgage.” I work with my husband, Steve Thorne Mortgage Loan Originator #60596 Equal Housing Lender